3/28/2005 @ 4:00PM

Sony's Loss May Benefit Microsoft

For such a little company,
Immersion
has certainly delivered an earthquake to the videogame industry.

Immersion
just won a patent-infringement case against Japanese consumer electronics giant
Sony
, which follows on the heels of another patent case it won in 2003 against mighty
Microsoft
. Immersion holds 270 patents around a technology called “haptics,” which makes videogame controllers shake and jolt in reaction to the action in a videogame.

Last week it won a $90.7 million judgment against Sony, which it sued in 2002 on allegations that some of its controllers infringed on its patents. The judgment, handed down by the U.S. District Court for Northern California in Oakland, also includes an order to stop shipping PlayStation 2 gaming consoles and all 47 games that work with the shakable controllers. The order is on hold, pending an appeal.

Should Sony choose to settle, there may be more than one winner in the case–the other being Microsoft. In 2003, Immersion settled a similar patent-infringement case with Microsoft over its Xbox gaming system. Under terms of that settlement, Microsoft paid Immersion $20 million in cash and took a 9% equity stake, worth $6 million, in the company. It also has an option to convert a $9 million debenture into more Immersion stock.

Moreover, Immersion Chief Executive
Victor
Viegas
Victor Viegas
says the settlement also includes a sub-license that allows Microsoft to cut license agreements on Immersion’s technology with other companies–including Sony. Under such a deal Microsoft would share license revenue. But should Immersion settle with Sony, the latter would be obligated to pay Microsoft a minimum of $15 million. That’s pocket change to a company that generates billions in cash every year, but could be viewed as a symbolic victory for Microsoft over Sony.

Viegas says the deal with Microsoft gave it a stronger negotiating position with other companies, and should give it increased leverage with Sony should the two come to the negotiating table.

The judgment award–assuming Sony loses its appeal and pays in the end–may be enough to push Immersion into the black. It has lost money for three years, and in 2004, lost $20.3 million on sales of $23.7 million.

In the Sony case, Sony has been ordered to pay Immersion 1.37% of its take on PlayStation 2 sales, which amounted to $82 million for the period of August 2001 (when it debuted) to June of 2004. Immersion’s Viegas said the company took in about $7 million more for the closing six months of 2004.

Should Sony lose on appeal, it would have no choice but to negotiate with Immersion or submit to the decision. Viegas says Immersion’s standard royalty rate is close to 5%, much higher than the 1.37% the courts have imposed. “This is a major event for Immersion,” Viegas says.

The judgment covers not only sales of the PlayStation 2 system, but also sales of future Sony gaming systems–including the as-yet unannounced PlayStation 3–which might come with controllers that vibrate. The recently released PlayStation Portable handheld is unaffected by the ruling.

The judgment comes as Sony is struggling with the videogame business. Sales of PlayStation 2 are down in the U.S. Sony recently said the 2004 operating income of its gaming unit was down 40% over 2003, and that U.S. gaming revenue has flagged. It sold approximately 20 million PlayStation 2 units worldwide in 2004, compared with 22.5 million in 2003.

A settlement with Sony would also erase some legal expenses for Immersion, which Viegas pegged at about $10 million last year.

Immersion is accustomed to shaking things up, as its technology is used to make electronics shake. The company’s clients include
BMW
, which uses Immersion’s technology to give drivers feedback when they use dashboard controls, and
Samsung
, which has started using it in mobile phones that vibrate different ways for different callers.
Logitech
,
Mad Catz Interactive
,
Apple Computer
and medical-equipment manufacturer
Medtronic
are also licensees.

Concerning a settlement with Sony, Viegas said: “We would not be interested in a one-time payment.”